Retirees in These 9 States Risk Losing Some of Their Social Security Checks
Adam Levy, The Motley Fool
7 min read
Social Security is an important piece of nearly every American's retirement budget. Around half of households with someone age 65 or older receive at least 50% of their income from Social Security and about one-quarter receive at least 90% of their income from the program.
With the importance of Social Security benefits for so many retirees, it's important to keep every penny of them if possible. Unfortunately, for those living in nine states, there's a chance they'll see a reduction in those monthly checks. Depending on your income, your state might tax a portion of your benefits.
Here's what you need to know.
How to keep more of your Social Security benefits
Before focusing on individual states, everyone collecting Social Security should know how their benefits are taxed by the federal government.
The U.S. government uses a metric called "combined income" to determine what portion, if any, of your Social Security benefits are subject to income tax. Combined income is the sum of half your Social Security income, your adjusted gross income, and any untaxed interest income. If your income exceeds the thresholds detailed below, you'll have to pay ordinary income tax on a portion of your benefits.
Taxable Portion of Benefits
Combined Income, Individual
Combined Income, Married Filing Jointly
0%
Less than $25,000
Less than $32,000
Up to 50%
$25,000 to $34,000
$32,000 to $44,000
Up to 85%
Over $34,000
Over $44,000
Data source: Social Security Administration.
You'll notice those thresholds are extremely low. That's because Congress hasn't updated those numbers for inflation since they were first created in the 1980s and 1990s. As such, more and more retirees are losing more and more of their benefits to taxes every year.
You can avoid paying some taxes on your Social Security income with good tax planning, though. If you can get more of your retirement savings into Roth accounts, withdrawals from those accounts won't count toward your combined income.
Still, you'll have to be very mindful of your capital gains and traditional retirement account withdrawals plus any interest earned on your cash holdings. Every penny counts when it comes to keeping your Social Security benefits tax-free.
If that wasn't enough to worry about, retirees in nine states also have to consider the potential burden of state taxes.
Image source: Getty Images.
9 states that tax Social Security
Many states don't tax Social Security benefits, and the number of states that do keeps getting smaller. For example, Missouri and Nebraska eliminated their Social Security taxes in recent years (effective in 2024), and Kansas eliminated it this year (effective immediately). There are just nine remaining states that will tax Social Security in 2024.
If you live in one of the following states, be sure to take your time to do the additional research to see how the state tax law effects your situation. You might find it beneficial to consult a professional tax planner to help you reduce your tax bill either this year or in the future. It pays to plan ahead for taxes in retirement.
Here are the basics for each state.
Colorado: Taxpayers under the age of 65 with more than $20,000 in taxable benefits on their federal income tax return will owe state income taxes on the amount above that threshold. Retirees 65 or older are exempt from taxes on Social Security benefits. The state tax rate is 4.4%.
Connecticut: Any Social Security income included on your federal income tax return might be subject to taxes in Connecticut if your adjusted gross income exceeds $75,000 for individuals or $100,000 for joint filers. However, the amount is limited to 25% of your benefits received regardless of what percentage is included on your federal return. The tax rate ranges from 2% to 4.5%.
Minnesota: Taxpayers can deduct up to $4,560 as an individual or $5,840 for a married couple filing jointly in Social Security from their taxable income. That amount is reduced for residents with adjusted gross incomes above $78,000 for an individual or $100,000 for a married couple before phasing out completely at incomes of $118,000 or $140,000, respectively. The tax rate ranges from 6.8% to 9.85%.
Montana: Any Social Security income on a federal income tax return is subject to state income tax. The tax rate ranges from 4.7% to 5.9%.
New Mexico: Taxpayers with adjusted gross incomes exceeding $100,000 for individuals or $150,000 for married couples filing jointly will owe taxes on any Social Security income also taxed at a federal level. The tax rate ranges from 4.9% to 5.9%.
Rhode Island: Taxpayers below their full retirement age, as defined by Social Security, with an adjusted gross income above a certain threshold will owe taxes on any portion of Social Security income also included on their federal income tax return. Those thresholds were $101,000 for individuals or $126,250 for married couples filing jointly in 2023, but they get adjusted for inflation each year. The tax rate ranges from 4.75% to 5.99%.
Utah: Taxpayers with an adjusted gross income exceeding $45,000 for individuals or $75,000 for married couples filing jointly will owe taxes on any Social Security income included on their federal tax return. Those below the threshold qualify for a credit to offset the taxes. The tax rate is 4.65%.
Vermont: Taxpayers with an adjusted gross income above $50,000 for individuals or $65,000 for married couples filing jointly will owe income tax on at least a portion of any Social Security income included on their federal income tax return. The tax rate ranges from 3.35% to 8.75%.
West Virginia: A total of 65% of any Social Security income included on a federal income tax return is subject to state income tax. Social Security taxation will phase out over time: 35% is taxable in 2025 and 0% is taxable starting in 2026. The tax rate ranges from 2.55% to 5.525%.
How to decide which state to retire to
It's true, retirees in the above nine states face the added challenge of state taxes potentially cutting into their all-important Social Security retirement benefits. But Social Security taxes are not a good reason to choose which state to live in for your retirement.
First off, tax laws change all the time. The current trend is that more and more states are eliminating taxes on Social Security income. It's quite possible all of the above states will eventually get rid of the tax. West Virginia already has the legislation in place to eliminate it by 2026.
More important considerations include the cost of living and what the community has to offer to retirees. If you want to live happily, eking out a few extra dollars in tax savings won't compare to a 15% reduction in your cost of living and a vibrant senior community with social activities. Those factors could have a much bigger impact on your quality of life than worrying about your tax bill come April.
That said, if the state you want to live in taxes your Social Security income, there are many different ways to avoid the tax bill without changing where you live. The earlier you plan for potential taxes in retirement, the better you'll be able to reduce or avoid the burden entirely. As mentioned, a professional planner could be worth the price if you live in any of the above states and you're worried about taxes.
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